UBS Real Estate Focus 2020

Zurich, 23 January 2020 – Last year the Swiss housing market recorded the steepest price hike since 2014. Apartment and house prices rose by around two percent. The increase was mainly driven by mortgage rates, which fell to a new all-time low last year. The declining cost of capital plays a bigger role in expensive central locations than peripheral ones. For example, residential property prices increased the most in economically vibrant urban regions such as around Lake Geneva and the Zurich and Basel metropolitan areas. Prices in the luxury segment rose three times faster than the Swiss average.

“We expect housing prices to rise slightly this year, too,” says Claudio Saputelli, Head Swiss & Global Real Estate at UBS Global Wealth Management. Upward pricing pressure comes from the small supply of new owner-occupied homes compared to rental apartments. Currently, owner-occupied homes likely account for only roughly 40 percent of all building permit applications, compared to 50 percent in 2012.

In city centers, strong demand for buy-to-rent properties and second homes has dried up the market for owner-occupied housing. Over 15 percent of apartments originally sold as owner-occupied homes end up on the rental market, while another 20 percent of homes are bought as second residences. However, if this additional demand disappears, the number of available homes will rise – and the scarcity would turn into a glut.

Nearly 70,000 rental apartments, or 2.8 percent of the total stock, were likely vacant at the end of 2019, which is roughly double the rate from five years ago. However, the oversupply has not dampened investors’ enthusiasm much. Construction permits were issued for around 44 000 apartments last year, or 14 percent less than the year before. However, the number of applications for construction permits has declined at a slower pace.

Housing construction is shifting to regions without vacancies. In 2019, the most construction permit applications – representing more than 1.5 percent of the respective housing stock – were filed in the metropolitan areas of the economic centers of Zurich, Geneva and Lucerne. Vacancies are increasingly eroding rental income in the most heavily impacted regions such as Solothurn and Ticino. In these areas, apartments on average generate no income for an entire month. One-sixth of the apartments stand vacant for twice as long. UBS real estate expert Saputelli explains, “Institutional investors appear to have reached their pain threshold for vacancies.”

Prices for apartment buildings have stagnated since 2016 despite falling discount rates. Price increases are almost exclusively limited to prime locations, as rising vacancies have curbed investors’ willingness to pay more at other locations. Asking rents will likely fall another 1 percent or so in 2020, which limits the upside for purchase prices.

Office space in central locations was a better investment than real estate in peripheral areas last year. City centers benefited heavily from employment growth driven by start-ups and small businesses, which tend to rely heavily on flexible office space. While the latter still accounts for less than one percent of total office space, its share is growing.

Employment growth is slowing, and dimmer economic prospects have curbed demand for office space. Rent hikes will probably be the exception, not the rule. Rents might even decline slightly across Switzerland. Economic risks have not been priced into rents, especially in central locations. The co-working business is highly cyclical and would shrink rapidly in an economic crisis. What is more, the cost optimization pressures unleashed by a significant economic downturn would drive demand back out of the city centers to the lower-cost suburbs and exurbs.

E-commerce looks poised to grow around 10 percent this year – the third increase in a row. Since overall retail sales are growing less than 1 percent, the best sales scenario awaiting brick-and-mortar retailers is stagnation. At the same time, retail space inventory has been growing since much retail space is being built in mixed-use properties whose upper floors are made up of offices or apartments. As a result, sales per unit area are expected to fall even more. Downtown properties advertised – at least away from High Streets – are relatively abundant. However, the oversupply has not yet affected advertised rents. “Rents are still too high on average. A decline is inevitable,” says Claudio Saputelli.


UBS Switzerland AG